Coinbase Completes Acquisition of Crypto Custodian Xapo

Coinbase, one of the largest cryptocurrency exchanges, has just acquired the custody business of Xapo, an institutional business service best known for storing Bitcoins (BTC) in a vault under a Swiss mountain. The acquisition follows Coinbase’s plans to expand its custody services, and could eventually lead to the San Francisco – based exchange storing over 5% of all Bitcoins in circulation.

According to an announcement made on Thursday, Xapo has been acquired for $55 million which was enough to outbid another strong contender – custody giant Fidelity. The firm stated that the new acquisition will help expand the company’s custody business as well as increase the assets under custody up to more than $7 billion.

The news follows weeks of speculation over the exchange’s intentions with Xapo, seeing as Coinbase Custody had acquired in early August Xapo’s largest client – crypto-asset manager Grayscale Investments who at the time reported having $2.7 billion under management. This is considered to be one of the largest crypto transactions in history.

Xapo, which launched in 2013, is known for its wallet services including physical storage vaults for Bitcoin, based in Switzerland, which are used to store customers’ crypto assets in an offline environment to ensure the safety of private keys. Prior to Grayscale being acquired by Coinbase, the firm reportedly held $5.5 billion worth of cryptocurrency.

Following the acquisition, Xapo will hold onto its exchange business, which lets ordinary consumers buy and sell Bitcoin. Xapo founder, Wences Casares, has stated that he will maintain his long-time role of CEO. In addition to that, Xapo will keep possession of the vault and use it to store Bitcoins on behalf of its retail customers.

According to Casares the retail exchange business has always been Xapo’s main focus, and the custody business had been established as a side business at a time when wealthy Bitcoin investors needed a secure place to park their digital wealth.

“In choosing Coinbase, we are confident that the Institutional Custody Business is going to a company that can provide great insurance, borrowing and investment alternatives,” said Casares. “We believe that Coinbase will take this opportunity to prove to our customers that they deserve their business.”

Meanwhile, the majority of Xapo’s largest clients have agreed to transfer their assets to Coinbase, giving the company control of over 514,000 BTC, currently worth $5.3 billion. If Coinbase manages to sign the remaining clients, then its custody service will have more than 860,000 bitcoin in total under custody, worth over $8 billion.

Coinbase CEO Brian Armstrong, has stated that ”custody is a critical step toward the institutionalization of crypto economy. It’s likely to start off small—maybe a few billion under custody—but it will grow quickly to a point that it’s a meaningful piece of stable, recurring revenue for the company.”

Prior to the acquisition in July this year, Coinbase Custody claimed to hold more than $2.5 billion worth of crypto from roughly 100 institutional clients.

Coinbase’s new custody services will include regulatory support and insurance, as well as staking, which extends to a sort of proxy voting service for cryptocurrencies that have built-in voting mechanisms.

“Fundamentally, we have to help our investors earn a return on their assets. You can imagine lending out Bitcoin and earning interest on that,” said Coinbase Custody CEO Sam McIngvale.

In the meantime, Coinbase isn’t the only company trying to get into the custody space. Earlier this year, startup Anchorage announced $40 million in backing from finance giant Visa as it seeks to lure in more institutional clients. Meanwhile, Palo Alto-based BitGo is also said to be competing to be a player in the custody space.